A Case For Hedging Your Bets With Deferred Compensation

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Under Section 457A of the Internal Revenue Code of 1986, certain offshore and other entities are limited in their ability to provide tax-effective deferred compensation to providers of services to those entities. In Revenue Ruling 2014-18 issued recently, the Internal Revenue Service confirmed that certain equity-based compensation arrangements are not subject to Section 457A. The ruling could lead to increased interest on the part of investment funds and their sponsors to explore the use of certain types of equity-based compensation arrangements.

This article discusses the history of Section 457A and the impact of the Ruling on compensation arrangements, as well as next steps for funds and their sponsors.